Friday Flight: Horsemen of Risk Gallop Again as Trade Concerns Rattle Market

Fresh tariff talk helped steer a flight to safety that seemed to accelerate into the Friday close. Stocks sold off sharply, the yield on the 10-year Treasury fell to around 1.5%, VIX soared above 20 and gold returned to the mid-1500s per ounce.

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Key Takeaways

  • Trade war fears pushed stocks much lower, while bonds tested last week’s highs
  • The S&P 500 and volatility didn’t break out of their recent ranges
  • Powell’s speech seen by some as dovish, but no promise of long rate cut cycle

(Friday Market Close) It looked like a promising week for a while there. Not any more.

Just a day or two ago, stocks were on pace to post a winning week for the first time in nearly a month. Bond yields were moving higher after falling out of bed the week before. The semiconductor and retail sectors were both on a roll.

It all changed Friday, as the week ended with tariff troubles back in the driver’s seat and many investors feeling unsure about the Fed’s next steps after Fed Chair Jerome Powell’s Jackson Hole speech. The “three horsemen of risk”—bonds, volatility, and gold, all surged as investors ran for perceived safety.

Things got ugly by afternoon. Major stock indices plunged more than 2% and yields inverted again at times during the session. Semiconductors got absolutely hammered, plunging about 4%. Technology, which includes semiconductors and has heavy exposure to the Chinese market, dropped 3%. But every sector lost ground. Only the “defensive” Real Estate and Utilities sectors fell less than 1.5%. Energy was another big loser as crude prices stepped back amid demand concerns.

Stocks like Apple (AAPL), Nvidia (NVDA) and others in the Technology sector are particularly attuned to the trade developments, so it wasn’t too surprising to see them get smacked on Friday. 

The carnage spread to bond yields as investors sought refuge in fixed income. By late Friday, the 10-year yield was back under 1.53%, down from highs above 1.6% earlier in the week. At times its yield fell below the 2-year yield, though whether that’s as big of an economic indicator as some economists might think is up for debate.

Powell’s speech, like his post-meeting press conference last month, didn’t promise a new cycle of rate cuts. He did signal that more rate cuts are possible and vowed to try and keep the expansion going. On the other hand, he called out trade as a confidence-sapping issue for businesses and said the Fed might not be able to provide much help on that front.

By the end of the day Friday, CME futures showed about a 90% chance of a 25-basis point rate cut next month, and a 9% chance of a 50-point cut. Some of the Federal Open Market Committee (FOMC) members at Jackson Hole gave conflicting views of what’s needed next. There were a few extremely dovish comments, but also some that expressed a more neutral stance. At the same time, the market does seem pretty confident that rates will drop again in September. 

Powell almost got lost in the shuffle not long after his speech, drowned out by presidential tweets and also by the earlier news of China announcing new tariffs on U.S. goods. 

Monday morning brings a key durable goods report that could bring more insight into the economy’s health. Consumers have been out spending money, retail earnings reports have been incredibly strong, and jobs reports have been good. On the other hand, there’s concern that business leaders might be rattled by the China trade war, something Powell alluded to in his speech Friday.

Perspective Time

At moments like these, it can be hard to feel confident as an investor. While it won’t do much for a depleted portfolio, it might help to take a step back and look at the broader market for perspective. 

Despite Friday’s losses, the S&P 500 (SPX) remains in the same relatively narrow range between 2800 and 3000 it’s been in for a while. In addition, the SPX is still well above the month’s lows down near 2825. Also, despite the 10-year yield’s retreat, it stayed above last week’s lows, and by the end of the session was above the 2-year yield. 

Also, futures rallied after the market closed, as people apparently wanted to cover shorts going into the weekend. That didn’t make up for stocks getting slaughtered Friday, naturally, but trades at the end of the day could signal sentiment changing as the weekend approaches. Everyone interested in next steps should consider watching how stock futures behave late Sunday. Headlines over the weekend could definitely play into the action as the new week gets underway.

One surprising performer on Friday was Boeing (BA), which saw shares get a lift after the Seattle Times reported hopeful developments on the grounded 737 MAX. 

Volatility zoomed up amid the trade-centered fears, with the Cboe Volatility Index (VIX) back above 20. Once again, though, it helps to keep perspective. The VIX didn’t challenge highs of 23 and 24 posted earlier in August, maybe a sign that investors aren’t as fearful as it might seem from the performance of the major indices.

This doesn’t mean all is well. We said going into the week that tariffs remained the major theme, and Friday offered more proof that even when you think the trade issue is temporarily out of the spotlight, it can pop back quickly to haunt Wall Street. We’re never more than a few tweets or Chinese tariff announcements away from more market trouble, it seems. 

This volatility might seem tempting for short-term traders, but it’s important to keep prudent during this sort of whipsaw action. Staying away from big positions might be a good idea until the volatility eases.

For long-term investors, it’s probably not necessary to watch all the minute-by-minute developments. Doing that can raise anxiety and maybe cause you to trade from a position of fear—something that’s probably not helpful in the long run. That said, you don’t necessarily have to stay on the sidelines. It could be worth checking your allocations of fixed income to stocks and seeing if it’s in a place you’re comfortable with over the long-term considering the way the trade war keeps thundering along. Hopes for a quick resolution seem to be fading, with both sides apparently digging in deeper.

Many investors appear to be gravitating toward what they might see as “safer” parts of the market like fixed income and dividend stocks. The Utilities sector is already up nearly 17% year-to-date, and is crushing the SPX over the last year. Some analysts wonder how much farther the “defensive” sectors can climb, saying they’re already priced pretty high. The same could probably be said for Treasuries, but with trillions of dollars in global debt now at negative yields, U.S. 10-year notes could still seem attractive to some investors at 1.5%, meaning more potential room to the upside for bonds. We’ll have to wait and see.


FIGURE 1: FEAR CREEPS BACK IN. After creeping back to the mid-teens this week, the Cboe Volatility Index (VIX) rallied above 20 for a period Friday. Note that the fear index has popped above the 20 line on several occasions in the past 12 months, typically coinciding with market selloffs. Chart source: Cboe Global Markets. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  


Good Trading,

JJ

@TDAJJKinahan

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This week's economic calendar. Source: Briefing.com
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Key Takeaways

  • Trade war fears pushed stocks much lower, while bonds tested last week’s highs
  • The S&P 500 and volatility didn’t break out of their recent ranges
  • Powell’s speech seen by some as dovish, but no promise of long rate cut cycle
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